Canadian dollar follows oil prices to higher close

TORONTO (Reuters) - The Canadian dollar finished higher versus the U.S. dollar on Monday, helped up by record high oil prices and a growing view that the worst of the credit crisis may be over.

Canadian bond prices closed higher across the curve as investors decided to revisit more secure assets following a string of losses in recent weeks that left prices at attractive levels.

The Canadian dollar closed at C$1.0127 to the U.S. dollar, or 98.75 U.S. cents, up from C$1.0163 to the U.S. dollar, or 98.40 U.S. cents, at Friday’s close.

A rise in oil prices to a record near $120 a barrel helped lift the commodity-linked Canadian dollar to C$1.0067 to the U.S. dollar, or 99.33 U.S. cents, overnight before it backed off during the first half of the North American session.

And while considerable stress continues to hinder credit markets, expectations that the U.S. Federal Reserve will follow a slew of hefty rate cuts with a smaller 25-basis-point rate cut this week has helped lessen some of the concerns.

“There’s a sense that the worst might be over for the U.S. economy, which tends to benefit (the Canadian dollar) relative to the crosses and sometimes even against the U.S. dollar,” said Sal Guatieri, senior economist at BMO Capital Markets.

“The U.S. dollar was supported by a sense that the Fed will likely hint at a pause in its easing cycle ... so basically we saw risk aversion trades get unwound and that tends to benefit the second tier currencies like the loonie.”

The Fed will make a decision on interest rates following a two-day policy meeting that ends on Wednesday, and plenty of attention will be directed to its statement to see if it signals an end to its latest easing cycle.

Canadian data due this week includes the February gross domestic product report on Wednesday, along with industrial product price and raw materials price indexes for March.

BONDS ALL EDGE HIGHER

Canadian bond prices reclaimed some steep losses suffered in recent weeks when talk of rising global inflation and the idea that the Fed’s aggressive rate cut campaign may soon be over lessened appetite for secure assets.

But dealers crept back into government debt during the latest session on the notion that some of the recent concerns may have been overdone and had resulted in sharper losses than had been warranted.

“Just been a groundswell of support for riskier assets in the last few weeks ... and I think that’s what has explained the rout,” said Guatieri. “So today we saw a bit of payback.”

The two-year bond rose 10 Canadian cents to C$101.77 to yield 2.870 percent. The 10-year bond climbed 24 Canadian cents to C$102.12 to yield 3.721 percent.

The yield spread between the two- and 10-year bonds was 85.1 basis points, up from 83.2 points at the previous close.

The 30-year bond added 31 Canadian cents to C$113.43 to yield 4.196 percent. In the United States, the 30-year Treasury yielded 4.559 percent.

The three-month when-issued T-bill yielded 2.61 percent, up from 2.60 percent at the previous close.